Are Mettler-Toledo International Inc. (NYSE:MTD) Investors Paying Above The Intrinsic Value?

Mettler-Toledo International Inc. -1.39% Pre

Mettler-Toledo International Inc.

MTD

1243.56

1243.56

-1.39%

0.00% Pre

Key Insights

  • The projected fair value for Mettler-Toledo International is US$957 based on 2 Stage Free Cash Flow to Equity
  • Mettler-Toledo International's US$1,225 share price signals that it might be 28% overvalued
  • The US$1,121 analyst price target for MTD is 17% more than our estimate of fair value

In this article we are going to estimate the intrinsic value of Mettler-Toledo International Inc. (NYSE:MTD) by estimating the company's future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for Mettler-Toledo International

Step By Step Through The Calculation

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF ($, Millions) US$862.0m US$935.0m US$956.4m US$1.02b US$1.07b US$1.11b US$1.14b US$1.18b US$1.21b US$1.24b
Growth Rate Estimate Source Analyst x4 Analyst x4 Analyst x1 Analyst x1 Est @ 4.41% Est @ 3.75% Est @ 3.29% Est @ 2.97% Est @ 2.75% Est @ 2.59%
Present Value ($, Millions) Discounted @ 7.0% US$805 US$816 US$780 US$780 US$761 US$737 US$712 US$685 US$657 US$630

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$7.4b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 7.0%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$1.2b× (1 + 2.2%) ÷ (7.0%– 2.2%) = US$26b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$26b÷ ( 1 + 7.0%)10= US$13b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$21b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$1.2k, the company appears slightly overvalued at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf
NYSE:MTD Discounted Cash Flow December 29th 2023

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Mettler-Toledo International as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 7.0%, which is based on a levered beta of 0.961. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Mettler-Toledo International

Strength
  • Earnings growth over the past year exceeded the industry.
  • Debt is well covered by earnings and cashflows.
Weakness
  • Earnings growth over the past year is below its 5-year average.
  • Expensive based on P/E ratio and estimated fair value.
Opportunity
  • Annual earnings are forecast to grow for the next 3 years.
Threat
  • Total liabilities exceed total assets, which raises the risk of financial distress.
  • Annual earnings are forecast to grow slower than the American market.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. What is the reason for the share price exceeding the intrinsic value? For Mettler-Toledo International, there are three essential aspects you should explore:

  1. Risks: Be aware that Mettler-Toledo International is showing 1 warning sign in our investment analysis , you should know about...
  2. Future Earnings: How does MTD's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  3. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks just search here.

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